Improve performance: scrap traditional contracts

November 27, 2017

Contract success is directly impacted by the motivation of the parties. Research increasingly shows that traditional forms of contract are demotivating and therefore can be directly responsible for under-performance. The way that terms are expressed, the extent to which they mandate specific actions and the degree to which they provide a relational structure are of particular importance.

A growing number of studies indicate a strong link between levels of autonomy and the quality of performance. Essentially, the less people feel they have autonomy, the lower their level of motivation and the greater the risk of unethical or dishonest behavior.

When we write contracts, we face many choices in how prescriptive they are. The same is true in the way we approach their negotiation or management and the associated communications with the counter-party. An approach that is rigid, formulaic and inflexible does not promote or allow the type of conversations and incentives that encourage innovative ideas or alternatives that increase value. The imposition of unreasonable levels of risk or unilateral demands for price reductions are similarly demotivating. They undermine goodwill and any sense of ‘we are in this together’. So what should we be doing differently?

The American Business Law Journal published an article by Todd Haugh which explores the role of ‘nudges’ in driving behavior. It reveals that communications or actions that increase or imply oversight may generate superficial compliance, but ‘workers may want to get back at a regime they see as too strict or overstepping’. Therefore contracts that mandate ‘how’ work is to be done, rather than ‘what’ is to be achieved, are likely to result in poor performance and disappointing results.

In ‘The Goldilocks Contract’, researchers from the Stanford Graduate School of Business investigated the impacts of contract structure and terminology on performance. They also found that the more the contract terms seek to impose control, the greater the impact on motivation. ‘Subtle reductions in the specificity of a contract’s language can boost autonomy, which increases intrinsic motivation and improves a range of desirable behaviors’. A range of experiments showed that less specific and less ‘legalistic’ contracts increase the counter-party’s persistence, creativity and cooperation. This is especially true with regard to the ‘legal’ terms (and methods of expression), which are often drafted in a way that appears threatening. The ‘technical’ or business terms should be designed to offer structure – for example, if they establish clear methods of governance, this will be beneficial.

There are many reasons why contracts are essential instruments, but in order to generate desired results careful thought must be given to the impact they have on performance. Traditional structure and wording is clearly not contributing to success.